Hedge Fund Launches Higher Despite Lower Fees

Renewed confidence in financial markets generally, and hedge funds in particular, seems to have launched the industry forward in early 2013. According to the Boston Business Journal, however, fees have continued their downward trend despite the renewed interest. With dwindling revenues despite climbing assets under management, how the industry copes with this changing dynamic will have a significant impact on hedge fund job seekers. Higher expenses from regulatory costs and taxation also are pressuring the bottom line for hedge fund managers.

New Hedge Fund Launches Up Significantly in First Quarter

The first quarter of 2013 saw a significant increase in new hedge funds being launched. The Chicago-based Hedge Fund Research Inc. reported that 297 funds were launched in the first three months of the year, which is the third highest quarterly total since the beginning of 2008. The first quarter of the year is traditionally a strong quarter however, with the only two stronger quarters coming at the start of 2011 and 2012.

The new hedge funds that are being launched are far more conservative than in the past, however. Industry executives have told the Boston Business Journal that most new launches are small and are taking much longer to come to market. “No one is doing anything overly funky,” Michael Silvia, Director at Marcum LLP told the Journal.

Strong Track Records Behind Successful New Launches

Many of the new hedge funds that are being launched are led by established and experienced managers. In uncertain economic times, the strong track record behind these managers provides some confidence to weary investors. Those with less experience are finding themselves seeing small allocations as investors test the waters carefully, or in some cases, they are unable to access the market altogether.

Fee Revenues Declining Despite Renewed Interest

Importantly for hedge fund bottom lines, and accordingly, the ability for firms to bring on new talent, fee revenues have not experienced similar strength in light of this renewed hedge fund interest. In general, investors are feeling fees are too high. Daivd Simoes of Deloitte’s hedge fund practice told the Journal that “the days of ‘two and 20’ are behind us,” reminiscing over the days when fund managers could comfortably earn two percent of assets under management as a flat fee and a 20 percent bonus fee for outperformance. In fact, in the first quarter, hedge funds earned 1.55 percent in management fees on average, and only 17.4 percent in average incentive fees.

What are the Implications for Hedge Fund Job Seekers?

The ongoing pressure on hedge fund fees is weighing heavily on their ability to hire more individuals, despite the growing funds they are managing. Overall, the industry has seen a substantial increase in costs as well, as regulation and taxation issues weigh heavily. This double impact of lower revenue and higher overhead expenses makes it hard to offer higher compensation to core investment staff or to make the investment in bringing on new members to the team. Unless the industry can see some stabilization on the fee front, hedge fund job opportunities likely face continued pressure.